E A S Sarma: FRBM on test

The Fiscal Responsibility & Budget Management (FRBM) Act enacted in 2003 was a somewhat diluted version of the Bill drafted by a Committee in July, 2000. Even then, it was indeed a big step forward, as it has served the main purpose, that is, to spell out the medium-term contours of the budget, with all the assumptions that go into it, and elevate the fiscal issues implicit in the budget for a wider and more transparent discussion by Parliament.

While the goals indicated in the Act for the revenue and fiscal deficits have shifted more than once during the last four years, the process that enhances fiscal transparency has come into motion. It should have a positive fallout for the economy in the coming years.

A more important spin-off from the Centre's FRBM initiative is the stimulus it has given to the states to enact similar laws of their own. The debt relief facility extended around the same time by the Centre to the states has helped hasten this process. It is remarkable that, except two states, all other states in the country have put in place their own FRBM laws, though with differing deficit targets.

It is also significant that there has been all-round improvement in the finances of the states during the last three years or so. A part of this improvement is attributable to the perceptible pick-up in economic growth and the consequent buoyancy in revenues.

FRBM alone cannot enhance fiscal prudence. Both the Centre and the states should have the will to improve the quality of expenditure, be transparent in presenting their budgets and ensure that the fiscal improvements become sustainable in the long run.

Unfortunately, this has not been the case. For example, there has not been any perceptible effort on the part of the Centre and the state governments to reduce unproductive expenditure. While subsidies for the poor are unexceptionable, a new kind of subsidies for the affluent, such as provision of valuable land and other infrastructure at concessional prices, tax holidays, and so on, have started eroding the public exchequer.

The coming months are going to test the governments' grit in moving towards fiscal prudence. First, the price of imported oil has broken the barrier of $100 a barrel, but the Centre is yet to pass on this message to the consumer. The bonds issued to the oil companies merely camouflage the budgetary deficit and make a mockery of the FRBM. Both the Centre and the States will soon have to shoulder the burden of the pay hike to be recommended by the new Pay Commission, without the prospect of any matching expenditure reform.

To compound these concerns, the government in general will soon be sucked into the fiscal vortex of the coming elections, with competing populist announcements. To what extent the government will uphold the FRBM spirit is anybody's guess!

The writer is Former Secretary (Economic Affairs), Government of India